Most mobile phones may get 4-5% costlier unless govt restores local manufacturing sops by July 1

Experts said government will have to come up with incentives by July 1 to ensure that Make in India remains an attractive proposition for contract manufacturers like Foxconn.Gulveen Aulakh | ET Bureau | Updated: May 20, 2017, 10:04 IST

Most mobile phones may get costlier by 4-5% with the government imposing a goods and services tax (GST) of 12%, taking away the benefit under duty differential that was being offered to local manufacturers.

Experts said government will have to come up with incentives by July 1 to ensure that Make in India remains an attractive proposition for contract manufacturers like Foxconn.

"GST rates are very positive signal to the industry, and we will certainly be pursuing the basic customs duty case and we believe that these two together, will give an impetus to local electronics manufacturing," IT and telecom secretary Aruna Sundararajan told ET.

"Either the existing regime will continue or the new regime with GST plus basic customs duty will come in, so either ways the industry will not lose out. We're trying to push for 5% GST but 12% is also a positive decision," she said, allaying fears or concerns of the industry with regards to continuation of the present duty regime.

Under the government's Make in Indian push, around 80% of 59 million phones sold in India in the January-March quarter were made locally, up from 65% in 2016 when 265 million phones were phones, as per Counterpoint Research.

Some 40 odd phone manufacturing plants have come up since, including 15 component making units, including Flex, Wistron and Foxconn.

In order to keep a differential between locally made and imported, the government is considering imposing a basic customs duty on mobile phones, senior government officials have earlier told ET. A final call is yet to be taken on this, but the industry hopes for more clarity on the duty differentials before July 1, from when the GST is expected to be implemented.

When asked whether the solution to keep Make in India going will be executed before implementation of GST, Sundararajan said that the department will work with the finance ministry on the timing.

According to rates fixed by the GST Council on Thursday night, 'Telephones for cellular networks or for other wireless networks [8517] and parts for their manufacture' will attract a rate of 12%.

So while imported phones will become cheaper, most of the locally manufactured phones will get costlier.

"29 out of 36 VAT jurisdictions in India (29 States and 7 Union Territories) have VAT rate on mobile phones of 5 % along with 1% excise duty; thus, the total incidence is 6% currently in most parts of the country," said Pankaj Mohindroo, president of Indian Cellular Association that represents handset makers including Apple, Samsung and Micromax among other.

"GST at 12% will cause 4-5% increase in prices in most geographies, therefore 5% GST rate recommended by the IT and electronics ministry is the most appropriate rate," he added.

Gujarat, Madhya Pradesh and Maharashtra, may not see price drops even though they have VAT rates between 12.5% and 15%, as they subsidize to avoid grey marketing, while prices may not rise in Punjab, Rajasthan and Chandigarh that have rates of 8-9%.

For mobile phones imported and sold in India, duty was from 17% going upto 27%, which now comes down to 12%, giving imports a leg up. And those made in lower VAT states would be priced higher to match up to 12% GST.

For example, the iPhones being made out of Peenya, Bengaluru are now likely to be billed to consumers at a higher rate.

"Prices of phones that are imported into India are likely to go down, while those made locally may go up in cases where they are being made from low VAT states like Karnataka," Bipin Sapra, partner looking at indirect taxes at EY told ET.

"The government will now have to find an incentive to keep Make in India attractive," Sapra added.

Prices of mobile phones at e-commerce players like Amazon, Flipkart, Snapdeal, Shopclues and others, where sellers of mobile phones have been supplying from low VAT states, primarily Karnataka, may now be higher than earlier, Sapra added.